COVID-19-Related Lease Modifications Raise New Issues of Liability for Unpaid Rent

|Lowndes Leasing Lawyers Blog

As pandemic-related shutdowns battered the retail and restaurant industry, many tenants avoided defaulting on their leases by negotiating a lease workout. These agreements often provided tenants some much-needed rent relief in exchange for extending the term of the lease.

However, commercial landlords should be aware that negotiating a lease workout/extension with a subtenant which modifies the term of the lease may relieve the original tenant of any obligation to pay rent should the subtenant default during the extension period.

Generally, when a tenant assigns or subleases its interest in a lease to another entity, the original tenant is still liable on the lease unless the lease provides that the original tenant is released from liability. Landlords often rely on the continuing liability of the tenant when consenting to an assignment or sublease.

If an assignee or subtenant extends the term of the lease pursuant to an extension or renewal option provided for in the lease, then the original tenant often remains liable for the extension or renewal term. However, if the assignee/subtenant extends the term of the lease beyond any extension or renewal options provided for in the original lease, this is considered a new lease, and the original tenant is released from liability.

As the California Court of Appeals noted in Meredith v. Dardarian (1978) 83 Cal. App. 3d 248:

[I] t has been recognized in several cases that if a lease contains an option in the tenant’s favor to renew or extend the term which is binding on the landlord upon the tenant’s election to exercise it, the tenant remains liable, under his covenant to pay rent, for rent during the extension or renewal, although he has assigned the lease and the option has been exercised by his assignee. Where an option to extend or renew is not automatically binding on the landlord at the election of the tenant, the tenant has been held not liable on his covenant to pay rent after renewal by his assignee.

Thus, when commercial landlords are negotiating lease workouts with an assignee/subtenant, landlords should carefully consider whether modifying the term of the lease, outside of any renewal options provided for in the lease, is worth releasing the original tenant from liability. Astute landlords should require the original tenant to agree to be a guarantor on any lease amendment which extends the obligations beyond the term of the original lease.

This article is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read here. Please review the full disclaimer for more information. Relying on the information provided in this article or communicating with Lowndes through our website does not create an attorney/client relationship.

Related Expertise

Jump to Page

We use cookies on our website to improve functionality and collect statistical information on our website traffic. For details on how we use cookies, please see our Privacy Policy. By using this website, you agree to our Privacy Policy and Terms of Use

Necessary Cookies

Necessary cookies enable core functionality such as security, network management, and accessibility. This type of cookie does not collect any personally identifiable information about you and does not track your browsing habits. You may disable necessary cookies by changing your browser settings, but this may affect how the website functions.

Analytical Cookies

Analytical cookies (also known as performance cookies) help us improve our website by collecting and reporting information on its usage at an aggregate level. You may disable analytical cookies by clicking on the Manage Cookies button.